6a – Consumer Decisions
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6a – Consumer Decisions
•Law of Diminishing Marginal
Utility (the graphs)
•Theory of Consumer Behavior
(the utility maximizing rule)
6a – Consumer Decisions
Must Know / Outcomes
•
•
•
•
•Vocabulary
•budget constraint
•law of diminishing marginal
•utility-maximizing rule
utility
•consumer equilibrium
•utility
•"util"
•total utility
•marginal utility
•rational behavior
Define, graph, and explain the relationship between total utility,
marginal utility, and the law of diminishing marginal utility.
Describe how rational consumers maximize utility by comparing the
marginal utility-to-price ratios of all the products they could
possibly purchase. (Utility maximizing rule)
Explain how a demand curve can be derived by observing the
outcomes of price changes in the utility-maximization model
Discuss how the utility-maximization model helps highlight the
income and substitution effects of a price change.
1. The utility of a good or
service:
1.
2.
3.
4.
is synonymous with usefulness
is the satisfaction one gets from consuming it
is easy to measure
rarely varies from person to person
1. The utility of a good or
service:
1.
2.
3.
4.
is synonymous with usefulness
is the satisfaction one gets from consuming it
is easy to measure
rarely varies from person to person
2. Marginal Utility (MU) is
the:
1. Sensitivity of consumer purchases of a good
to changes in the price
2. Change in TU divided by the price
3. TU divided by the quantity consumed
4. Change in TU obtained from consuming one
more unit
2. Marginal Utility (MU) is
the:
1. Sensitivity of consumer purchases of a good
to changes in the price
2. Change in TU divided by the price
3. TU divided by the quantity consumed
4. Change in TU obtained from consuming one
more unit
3. What is the MU of
the fourth unit of
product L?
1.
2.
3.
4.
20
18
4
2
3. What is the MU of
the fourth unit of
product L?
1.
2.
3.
4.
20
18
4
2
4. The law of diminishing MU states that:
1. TU is max’ed when consumers obtain the
same amount of utility per unit for each unit
consumed
2. Beyond some point additional units of a
product will yield less and less extra
satisfaction
3. Prices must be decreased to induce firms to
supply more of a product
4. When TU is at its max then MU is also at its
max
4. The law of diminishing MU states that:
1. TU is max’ed when consumers obtain the
same amount of utility per unit for each unit
consumed
2. Beyond some point additional units of a
product will yield less and less extra
satisfaction
3. Prices must be decreased to induce firms to
supply more of a product
4. When TU is at its max then MU is also at its
max
5. To maximize utility a
consumer should spend their
money so that the:
1. Elasticity of demand on all products is the
same
2. MU obtained from the last dollar spent on
each product is the same
3. TU derived from each product consumed is the
same
4. MU of the last unit of each product consumed
is the same
5. To maximize utility a
consumer should spend their
money so that the:
1. Elasticity of demand on all products is the
same
2. MU obtained from the last dollar spent on
each product is the same
3. TU derived from each product consumed is the
same
4. MU of the last unit of each product consumed
is the same
6. Suppose that the
MUx/Px > MUy/Py, to
maximize utility the
consumer should buy:
1.
2.
3.
4.
Less of X only if its price rises
More of Y only if its price rises
More Y and less X
More X and less Y
6. Suppose that the
MUx/Px > MUy/Py, to
maximize utility the
consumer should buy:
1.
2.
3.
4.
Less of X only if its price rises
More of Y only if its price rises
More Y and less X
More X and less Y
7. If PL=$3, PM=$4,
income =$18, how
many of each will a
rational consumer
buy?
1.
2.
3.
4.
6L and zero M
4L and 1M
2L and 3M
3 L and 2M
7. If PL=$3, PM=$4,
income =$18, how
many of each will a
rational consumer
buy?
1.
2.
3.
4.
6L and zero M
4L and 1M
2L and 3M
3 L and 2M
8. If PL=$3, PM=$4,
income =$18, what
is the maximum TU
possible?
1.
2.
3.
4.
87 utils
104 utils
51 utils
58 utils
8. If PL=$3, PM=$4,
income =$18, what
is the maximum TU
possible?
1.
2.
3.
4.
87 utils
104 utils
51 utils
58 utils
9. TU can be determined by:
1. Change in TU / change in Q
2. Summing the MU of each unit consumed
3. Multiplying the MU of the last unit consumed
by its price
4. Dividing the MU of the last unit consumed by
its price
9. TU can be determined by:
1. Change in TU / change in Q
2. Summing the MU of each unit consumed
3. Multiplying the MU of the last unit consumed
by its price
4. Dividing the MU of the last unit consumed by
its price
10. When TU is at its
maximum, MU is:
1.
2.
3.
4.
zero
negative
positive and increasing
positive but decreasing
10. When TU is at its
maximum, MU is:
1.
2.
3.
4.
zero
negative
positive and increasing
positive but decreasing
6a – Consumer Decisions
Must Know / Outcomes
•
•
•
•
•Vocabulary
•budget constraint
•law of diminishing marginal
•utility-maximizing rule
utility
•consumer equilibrium
•utility
•"util"
•total utility
•marginal utility
•rational behavior
Define, graph, and explain the relationship between total utility,
marginal utility, and the law of diminishing marginal utility.
Describe how rational consumers maximize utility by comparing the
marginal utility-to-price ratios of all the products they could
possibly purchase. (Utility maximizing rule)
Explain how a demand curve can be derived by observing the
outcomes of price changes in the utility-maximization model
Discuss how the utility-maximization model helps highlight the
income and substitution effects of a price change.